George Hongchoy is the CEO of Link Asset Management Limited, which includes the Hong Kong listed Link Real Estate Investment Trust — the first REIT in Hong Kong and the largest in Asia.The experience of his company acquiring a large number of retail properties from the government, then upgrading them, gives him a unique view of how the retail sector in Hong Kong and China is evolving. In this Knowledge@Wharton interview, he offers his views on online-to-offline retail, the differences between the retail sectors of China, Hong Kong and the U.S., and what lies ahead.

Hongchoy is also chairman of the supervisory committee of the Tracker Fund of Hong Kong, an exchange traded fund that follows the performance of the Hang Seng Index. He was named Business Person of the Year in Hong Kong as part of the DHL/SCMP Hong Kong Business Awards in 2015, and he received the Asian Corporate Director Award from Corporate Governance Asia. He was also named the Best CEO by FinanceAsia’s poll of Asia’s best companies in 2012-2015.An edited transcript of the conversation follows.

Knowledge@Wharton: Please tell us about your company.George Hongchoy: The Link Real Estate Investment Trust — or Link REIT, as we refer to it — was listed in 2005. It was the first real estate investment trust in Hong Kong. It acquired a portfolio of community shopping centers from the Hong Kong government. The government had been building these shopping centers as part of low-cost housing real estate, and the properties were put into the REIT…. We have since been transforming these assets, improving the retail space.Over time we have also expanded beyond Hong Kong to China, with assets now in Beijing, Shanghai and Guangzhou. We have also expanded into new property types. Beyond the retail properties we also have offices, office buildings and car parks. The market cap of Link REIT is now roughly $18 billion.

Knowledge@Wharton: How do REITs in Hong Kong differ from those in U.S.?Hongchoy: To a large extent, how [REITs are] operated is very similar. The income, at least 90% of the income, needs to be distributed. We do not have the tax advantages of REITs in the U.S. … [which is] the only major difference, but by and large the main features are similar with gearing limits and with the minimum payout. The history obviously is that the REIT market really started in the U.S. in the 1960s and there are now over 1,000 REITs in the U.S. In Hong Kong there are only about a dozen, so it is a new market; it’s a new investment vehicle. But we have a lot of interest from investors all around the world and also retail investors in Hong Kong.

Knowledge@Wharton: We know that in the U.S., bricks-and-mortar stores are suffering — not only the stores but whole chains have been going out of business at a pace we haven’t seen for years, even as the U.S. economy seems to be improving. One result: A lot of malls have vacancies, a lot of malls are closing, or they are trying to repurpose their space and put in health clubs, office space and other uses. The culprits usually cited are the fact that there are too many stores in the U.S. and so there is a shakeout underway. The other big cause cited is competition from online sales, notably Amazon, often through the use of mobile. How does the retail experience for brick-and-mortar properties in Hong Kong and China differ from the U.S.?Hongchoy: The history of the development of consumer sectors overseas is very different, yet we have seen a somewhat similar sort of trend growth of online retail. But the experience of having only started building shopping centers in the last 10 to 15 years means that there are not a lot of properties that were here 20 or 30 years ago, which don’t fit a current purpose as in the U.S., where some of them really have to change the layouts, and the type of services and products they are offering in the mall.The Chinese consumer market has been growing rapidly, although it has seen some slowdown, but it still far exceeds the global average growth. We’ve seen double-digit growth in the early parts of 2010-2014. More recently, in 2016, it was still growing by 7%. So we have very strong growth in consumer spending, and the government policy is also shifting towards the consumer-driven rather than export-driven, which has helped consumer growth. And, wage levels have increased quite a lot in the last 10 years.Online has indeed grown very fast. It now accounts for 13.5% of total retail sales compared to only 7.7% in the U.S. [A big part of the reason for that] is ownership of smartphones, especially in the last few years – there are very well-developed mobile payment solutions, and very easy and inexpensive delivery services. A lot of Chinese shoppers like to compare prices, and so online allows them to do that more easily than walking from shop to shop.A combination of these factors has helped. I know [Wharton] professor David Bell has written a lot about what sort of products should be online or offline. We also are seeing, similar to other countries, that the online companies are also moving to have an offline presence and building a physical presence, or investing in physical retail chains. Over time it’s really a merger of the two experiences, to serve the consumers wherever they want to shop.Knowledge@Wharton: In the U.S., you’ve got Bonobos and Warby Parker, and now Amazon has some physical stores. They are working to create a more seamless experience between the physical store and the online experience. What do you see in Hong Kong and China that relates to this approach? Are there lessons for the West?Hongchoy: We have to realize firstly that a lot of people in China have never owned a PC, have never had a fixed line. So when mobile comes along, that’s the first thing that they have. What happened to drive the whole change is that the barrier to entry is a lot easier when you’re thinking about only building a business on mobile. So, skipping that technology legacy has helped China and a lot of the businesses to grow a lot faster.And in the consumer mindset — every shopper is really just thinking about, “Okay, I want to buy something. How fast can I do that? What is my journey?” And during that journey, whether it is through the app or through the experience, they can actually gain some pleasure out of it. So there’s a lot of talk about that experience-based business model rather than the transactional — how we can actually make this fun for people. Even buying weekly groceries, why should that be a chore? Can’t it be fun?Those are some of the things that I think a lot of businesses in China have been trying to come up with — new models for doing it. And maybe this is a part of globalization, but a lot of U.S. companies are trying to learn how China is doing it, and a lot of Chinese companies are going to the U.S. to learn.I think there are a few advantages, though, in China. One is the payment solution. Most of the consumers in China either use Alipay or WeChat Pay. And having only one or two, or very few payment solutions will help the shoppers because they don’t have to open their wallet and choose from 10 different ones, and think “which one should I use this time?” On the flipside, merchants also do not have to install that many options — they wouldn’t know which shopper uses which [payment method] and so they would have to install ten different machines on the countertop [if there were many payment solutions].So, having fewer payment solutions [helps]. I see that in the U.S., Amazon and eBay don’t really have a payment system well-embedded in their own platforms — relying on, I guess, other payment platforms. That is one issue. The other is this incumbent problem. If some of the retailers already have “X” number of stores, the incentive to move towards online becomes more difficult because every time the decision is, first, about how to strengthen the current physical presence. It makes the decision a lot more challenging. But if you don’t do it, I guess someone else will be eating your pie — you have to react.The other thing I have noticed is that the consumer does want to go online to do a lot of research, but at the end of the day they want that physical touch and feel in the store, and so that cannot be replaced. In the end, I think one thing that is important is the social aspect of being with other people — whether it’s family, friends or classmates — in a physical location. That is something that [will continue]. But it has to be fun.So how can you make it easy [for consumers]? Make sure they know how to find what they want — whether there’s a parking app to find their car or an e-directory. And [retailers need] the sort of data analytics to understand the type of customer coming into the mall. There is a lot of research being done on both sides, both in the U.S. and Asia. And I think retailers are less worried than five years ago when everybody was sort of scared that it could be the end of physical retail. Now I think people have understood it more, and O2O [online to offline] has become the buzz word these days.

Knowledge@Wharton: In Hong Kong, e-commerce and mobile shopping haven’t caught on as much as in China, partly because of Hong Kong’s unique geography. It’s compact; it’s easy to get around. Can you talk about that difference, and also, I’m wondering if what you see in Hong Kong would also apply to places in the U.S. like New York City, for example? That’s also island.Hongchoy: In Hong Kong or any compact city with high density, a good transport network does help because then it’s easy to get to the shops. And shop hours: Hong Kong shopping centers and shops tend to remain open very late into the night hours. Some people work until very late; in a lot of cities you can’t find anywhere to pick up your food [when it’s late], and there are other things that you want, but in Hong Kong the hours that shops remain open helps.And then we have very small apartments [in Hong Kong]. When you have small apartments, the consequence is that it is very hard to entertain your friends and relatives at home. Shopping centers provide a place [and become] a much bigger part of your social life – it is not just for shopping but also for dining and entertaining. So, it’s not too different in New York – there are a lot of restaurants, and they do very well.

And [another] trend seems to be the case in a lot of places in the last couple of years where people have moved away from this heavy consumerism. How many shirts and pairs of trousers can you buy? The past recession also made people [conscious of owning so much], and so now there is not a revolution — but certainly people are saying, “We actually want the experience; we actually want the entertainment, the gathering of people” and all that. In a compact city, that’s even more so than in a more spread out country.In Hong Kong, the number of people shopping online has still gone up a lot — from 7% in 2004 to about 23% in 2014. The number is still behind China, but it is indeed rising, and people are trying it. And I think that is certainly the experience for any similar city, whether it’s New York or London.

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